David Prosser: RBS falls into the cauldron of politics

Friday 4 December 2009 00:00 BST

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Outlook One way to think about the row about Royal Bank of Scotland's bonus pot is to pose a question. As a taxpayer, would you rather suffer the sight of RBS staff trousering huge bonuses than look forward to the public purse being buoyed sooner rather than later by a decent gain on our collective investment in the bank?

That's the way RBS characterises the argument. It believes limits on its bonus policy that don't apply to other banks will see it lose its best people to those rivals. Underperformance will follow, dragging down the bank's shares and damaging the taxpayer's holding. Remember, the break-even price on the Government's investment in RBS is 50.5p – the shares are currently at around 35p and fell sharply when the row over bonuses broke earlier this week.

Gordon Brown said yesterday that the question would not arise at RBS, because it would be treated no differently to other banks. He pointed out that there were now international agreements on what form bankers' bonuses should take and how they should relate to performance.

Mr Brown might have added that the Chancellor also possesses a document that offers clear guidelines on how he might decide whether or not to veto RBS bonuses. The mandate given to UK Financial Investments, the agency that supervises taxpayer holdings in the banks, says "remuneration incentives" at these companies should "promote long-term, sustainable performance" and "enable them to attract and retain the staff needed to advance UKFI's objective of protecting and creating value for the taxpayer".

If Alistair Darling follows this guidance, he should have no problem signing off on RBS's proposals. As the Chancellor will know – but those who detest fat-cat bankers may not – there are no agreements or rules in place on how much a banker should be allowed. The sky is the limit.

The problem, however, is that the PM is wrong about discrimination. No other bank is having its bonuses cleared by a politician this way – it's one thing ensuring your remuneration policies meet internationally agreed standards, but quite another designing them in the context of the febrile political environment in which Mr Darling will have to act.

The Chancellor may now wish he had pressed other nations to cap the the size of bank bonuses. He did not, however, which leaves him facing the same question as other taxpayers. The rational answer is that leaving RBS free to set the bonus policy it deems appropriate is the best way to ensure taxpayers get their money bank as speedily as possible.

Whatever one thinks about the Chancellor's competence, he has so far done a good job in not allowing his actions during the crisis to be coloured by political considerations. On the RBS question, maintaining that record will be quite a challenge.